Can Microfinance Help to Reduce Poverty? A Review of Evidence for Developing Countries

Abstract

The main objective of this paper is to study the effects of microfinance on poverty reduction in developing countries, using cross-sectional and panel data. We show that a country with higher microfinance institution (MFI) gross loan portfolio per capita tends to have lower levels of poverty headcount ratio and higher level of expenditure of consumption per capita, confirming the role of microfinance in poverty reduction at the macro level. We show also that microfinance loans per capita are negatively associated with poverty gap (which measures the depth of poverty) and squared poverty gap (which measures the severity of poverty), implying that MFIs benefit not just the poor but also the poorest.